Wednesday, 24 March 2010

Journalism: The Advertising Business Model

A few weeks ago Y Combinator funded NewsLabs announced a call for journalists for their new news platform which seeks to provide a platform that journalists can use to publish their articles with NewsLabs handling some of the work traditionally done by newspapers (ad sales, hosting, etc.)

The basic business model they propose is selling ads on the content and doing a 80:20 revenue split with the journalists doing the writing while avoiding the high overhead costs that traditional newspapers have.

The obvious question is: Will the web advertising model produce enough money to make this financially viable.

Let's construct a business financials model and see if the figures add up. There are two key figures,

How much it'll cost to pay a journalist for an article to make it a viable alternative to writing for traditional newspapers

How much money an article can bring in.

If the second is higher than the first we have a workable business model.

For the first we can just use industry standard figures. Typically a journalist will get paid between $0.10/word (low-end) to $0.50/word (high-end). Most professional freelancers will get somewhere between those two figures, so lets take $0.30 (a typical rate for an article that would require some research) as our average cost and 1000 words as our average article size. From this we get the cost per article of around $300.

How much money an article can bring in is trickier due to huge variations in ad rates. So to get around this let's establish a range. To get sample price data I used the Federated Media rack rates, FM provides advertising for a wide range of popular blogs and news sites so is probably reasonably representative of the type of content we're interested in. Let's assume we'll run three ads per page, a Wide Skyscraper, a Leaderboard and Medium rectangle - a combination fairly popular on news sites.

From FM's catalogue I picked their most expensive ad prices for our best case, prices from the second highest quartile for the average case and prices from the fourth quartile for our worst case.

However before we can uses these prices we need to apply a couple of discount factors. Firstly because FM will take a cut of around 40% (which is typical cut for ad sales) and secondly because often a lot of ad inventory will remain unsold by direct sales. Typically for unsold inventory (called "remaindered" in the industry) those ad spaces are replaced with a generic source of ads such as Google Adsense. So I've added some estimates for how much our remaindered ad space will bring in, $0.50 - $3 CPM is typical for general content so those are the figures we'll use.

So now lets plug the numbers into a spreadsheet and see what we get (click to enlarge):

Best Case

Average Case

Worst Case

Before we look at these figures in details lets do a little sanity check to make sure our numbers aren't completely crazy. One way to do this is to run an alternative analysis and see if the numbers match up.

Luckily Dharmash Mistry (former executive at EMAP; now partner at VC firm Balderton Capital specializing in media) has done this for us. He did an analysis of online newspapers and came out with an estimate that a newspaper website with 20 million unique monthly viewers would likely make less than £20 million/year. To get a comparable CPM we need to convert monthly views into page views. As audited circulation figures are made public we don't have to guess this value but rather just look it up where we can see that when the Guardian had 20 million page unique monthly viewers they had 186 million page views.

If we crunch these numbers we get a CPM of $13.40 - so slightly worse than our average case of $17.40 but in the same sort of ball park, indicating our model is probably not unreasonable if a little optimistic.

Now we can combine our figures for advertising and the cost to pay a journalist for an article and come up with a figure of how many page views we need. At $17.40 we'd need 22,000 views per article (at $13.40 we'd need 28,000), while these figures aren't completely infeasible for a good writer, it seems unlikely that a significant number of journalists would be able to maintain that sort of readership for an individual column over a prolonged period especially for only "average" returns payment wise.

Overall it seems even with a "bare-bones" model, there just isn't enough money in online advertising to finance journalism.

5 comments:

Nice arguments, but all this assumes that the journalist needs the apparatus of a support structure to function-- which is no longer true. Try this math:

I launch a blog covering, say, securities law-- and I'm awesome, so it's brilliant, and people love it. I charge $50 for a one-year subscription. I get 1,000 people to sign up. Total subscription revenue: $50,000. That alone almost equals the median U.S. income for 2008 ($52,000).

I also host a few sponsored Webcasts on legal issues, with law firms or IT firms that want to reach my audience. I charge them $1,000 and I do one per month, one hour long. Sponsorship income: $12,000.

Finally, since my content is fabulous and I have a high-end clientele, some recruiters, consultants and software vendors occasionally post some ads on my site. I charge $200 per week, and have them 26 weeks per year. Total ad revenue: $5,200.

My total income right now is $67,200-- which is a fair salary for any reporter, and I've low-balled all the figures above. I could go 50-50 with a sales guy, really pour in the sweat equity, and build revenue up to $200,000 split two ways.

Granted, this is all back-of-envelope, over-simplified stuff, but you can see where I'm going with it. In the online world, the corporate structure is simply the *wrong type* of structure to flourish. You won't get rich, but you can earn a very respectable living on your own.

Hi, I'm a founder of NewsLabs. Your article is pretty good, but it's based on a flawed assumption: that the only revenue stream available is advertising. I'm pretty sure ads alone are insufficient to support journalists, so it's no surprise that your figures showed that.

Instead, you should look at how existing sites like TechCrunch make money. In general there are multiple models at work: ads, syndication, job boards, events. We have another few things up our sleeves too.

Very interesting perspective. It seems any time new media technology comes to market, pundits everywhere declare existing media to be dead. Clearly that has never been the case… And, I suspect won’t be the case in the future either. Where I would challenge your point of view is to say that new media and new ways to reach customers relying on cash advance online are making traditional media evolve rapidly. More than ever before, in fact. Personally, I believe that it won’t be long before all paid media is interactive and is designed to extend into owned and earned media. For example, paid ads will be designed to facilitate social interaction (earned media) and / or extend the storyline into longer, larger content chunks produced by the marketer (owned media.) By extending the story through multiple channels and media types, marketers create a more immersive experience that customers can dive as far into as their needs take them